Posted on: 29 Nov, 2019
With the equity and bond market in the US closed due to Thanksgiving, two themes dominated the proceedings in the last 24h. Firstly, the Pound maintained its trend highs at an index level as the market prices in a Tories majority in the UK general election. The second topic included the response of China to the signing of the controversial HK bill by Trump. Today's reports breaks it all down.
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The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.
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The renewed momentum in the Pound, boosted by the UK Gov MRP poll, has stood out this week amidst a sea of tranquility elsewhere. Perturbing this low vol G8 FX environment (exc GBP), even if quite ephemerally, was the signing of the Hong Kong Human Rights and Democracy Act by US President Trump. This action infuriated China, and even if the immediate reaction in risk sensitive assets was to play defensive by unwinding JPY, CHF, Gold shorts, the situation failed to simmer down the mood as China appears to take it easier as the risks of a derailing of the trade talks diminish. In today’s report, I will go on a deeper dive into these two overarching themes the market is focused on.
The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.
The first theme that requires our attention has to do with the punchy movements seen in the Pound as the rally gets re-fuelled with fresh momentum after more evidence was collected that this is looking increasingly likely as a UK general election with Conservatives as the favorites by a large margin, which implies the market is more convincingly pricing in a Tories’ majority.
In fact, the market is so confident that this election will be won in a landslide fashion by Boris Johnson’s party, that the latest predictions by betting sites put the Tories at 352 seats, which, if proven a rough approximation of the actual outcome, means the party is in a safe place to get the much-ndeed 320 seats to obtain a majority.
Yesterday’s much-awaited YouGov MRP poll, I must say, has been the icing on the cake to re-energie GBP longs, as it detailed the Tories are en-route to take over 360 seats, which would be a massive 43 seats improvements from the 2017 election.
Note, this YouGov methodology is widely followed as it's gained reputation since it managed to predict the loss of Theresa May's majority in 2017. It therefore goes a long way in explaining why the market was so fixated in the latest findings, and why the Pound has reacted so positively to the outcome.
Out of all the movements seen in the GBP, one that especially caught my attention, which I touched on yesterday's live stream (min 28’) is the GBP/JPY market. The market has finally found acceptance outside of its range on a daily closing basis, which suggests players are finally finding value outside of the well-established range. Should the follow through demand continue, we may be looking at an extension of about 300 pips based on a 100% measured move.
However, with the GBP strength being a more familiar theme, today’s report will be centered more exclusively in another evolving narrative dominating proceedings in the last 24h having caused the only brief spells of volatility as the week comes to an end.
Next up, there was a sudden yet brief spurr of volatility in risk sensitive assets in the previous Asian session as US President Trump went on to sign the Hong Kong Human Rights and Democracy Act, a bill that supports the protesters in HK. Once the market learnt about this development, an immediate sense of panic settled in as fears mounted that China would retaliate in a manner that could jeopardize the progress made in the trade front.
The good news for the overall risk appetite is that China, even if infuriated by calling this Act a ‘gross offense against its own internal affairs’ or ‘a blatant hegemonic move’, it has not responded in a way that would suggest they want this issue to interfere with the trade talks.
The evidence so far, in remarks made by the Global Times editor Hu Xijin, is that China will be taking a pragmatic and more lenient approach than initially feared.
The editor tweeted: “Based on what I know, out of respect for President Trump, the US and its people, China is considering to put the drafters of the Hong Kong Human Rights and Democracy Act on the no-entry list, barring them from entering Chinese mainland, Hong Kong and Macao”.
If that’s all China is thinking to do as a form of retaliation, the market will be quick to put this topic around the HK bill on the back-burner and move on, which implies, clearance for ‘risk on’ dynamics to return or else being equal…
The South China Morning Post reinforced the notion that a fallout in trade talks is unlikely in an article citing Lu Xiang, a research fellow specialising in US-China relations at the Chinese Academy of Social Sciences, saying that “Beijing should not overreact to America’s move but should be prepared to counter if it used the act to put pressure on China in the future.”
Xiang went on to add that “bilateral relations are extremely complicated. It’s a chemical compound, not a mechanical relationship like in the cold war. China wants to cooperate with the US but we are also prepared for [ties] falling apart.”
“It does spoil the mood, but it shouldn’t interfere with the trade talks, ” said Wang Yong, a professor of international relations at Peking University, of Mr. Trump’s move. “Both sides have enough reasons to keep trade, Hong Kong and political issues on separate tracks.”
Beijing has been trying to keep geopolitical issues separate from trade negotiations and it appears, as per the initial soft reaction by China, that they want to keep it that way.
Even if the HK bill may make it more politically challenging for President Xi to sign a so-called phase-one trade deal, that fact that Trump has been much less outspoken about the bill is keeping China sidelined as to how tough they should counter-attack for the sake of diplomatic relationships and the avoidance of not derailing trade talks.
China appears to still want to give the U.S. president the benefit of the doubt as it’s ultimately the President that has the last say in implementing the law. And based on a sentence in Mr. Trump’s HK bill signing statement that emphasized his limited “constitutional authorities with respect to foreign relations”, this is still seen by China as an insurance that there’s a lot of appetite for talking tough on China, but not that much in terms of actually being tough.
One of the markets that helps to decipher the current mood in the trade talks is the AUD/JPY. It acts as a barometer of what’s the market currently thinking in terms of the risks that this latest HK bill issue constitutes for the successful completion of the Phase One trade deal.
We can observe that the market never found sufficient selling interest to retest the initial bottom found immediately after the news broke out. Instead, the two attempts that followed in different time sequences were followed by solid interest to buy off the lows for what constituted a rather healthy recovery past the 50% retracement from the initial sell-off. The real test, however, will come once the market retest the origin of the supply imbalance from 74.20.
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